Protecting Your Bank Against Ponzi Scheme Claims Related to Deposit Accounts
When victims of Ponzi schemes, also referred to as fraudulent investment schemes, cannot collect from the persons who committed the fraud and "stole" their money, they often look to the bank that handled the deposit account used in the fraud as the deep pocket for recovery. After the July 30, 2013 decision in Parlin Fund LLC, et al., v. Citibank N.A., Case No. 1:13-CV-111, 2013 U.S. Dist. LEXIS 106511 (S.D. Ohio, July 30, 2013, J. Beckwith), individuals damaged by investing in Ponzi schemes may find it much harder to pursue banks.
Parlin involved charitable entities that invested $2 million in what turned out to be a Ponzi scheme run by individuals who were customers of a bank. These individuals allegedly used their accounts at the bank to effectuate the fraud. The charitable entities were not customers of the bank and the bank never communicated directly with the charitable entities. Yet, the charitable entities filed suit against the bank to recover their $2 million in losses. In response to the complaint, the bank filed a motion to dismiss all claims.
The Parlin Court issued an order granting the motion to dismiss the charitable entities' complaint in its entirety and entered a judgment in favor of the bank. The Parlin decision is a win for all banks who conduct business in Ohio and elsewhere because it creates important guideposts that all banks should follow to establish fraud detection procedures, internal customer policies and procedures, policies on non-customer communications, and to respond to demands or lawsuit asserted by non-customers who are the victims of customer fraud.
Liability to non-customers for customer fraud primarily hinges on establishing that the depository bank somehow owed the non-customer a duty of care. To avoid liability for customer fraud, banks should adhere to their internal policies and procedures and train employees on written and oral communication with non-customers, in order to avoid establishing a relationship that could give rise to a duty of care to a non-customer.
After the decision in Parlin, the future may hold many more early stage dismissals when Ponzi scheme victims sue the banks who held the deposit accounts used to commit the fraud. Training employees on fraud detection and how to communicate with non-customers without increasing bank exposure will make this easier. If a case against a bank progresses, following well-written and comprehensive internal protocol for fraud detection and monitoring customer accounts will help protect your bank against the unfairness of the Ponzi scheme blame-shift game.
The lawyers in Frost Brown Todd's Financial Institutions and Business Restructuring and Bankruptcy Practice Groups regularly advise banks in the development of internal and external policies and procedures and in all types of litigation matters. Because the legal analysis of duties or non-duties that a financial institution may owe to non-customers may vary from state to state, please consider contacting us if your institution is concerned about mitigating this risk issue.
For more information about this legal update, please contact Paige L. Ellerman or any of the attorneys in Frost Brown Todd's Bankruptcy and Restructuring Practice or Financial Institutions Service Area.
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Courtney Rogers Perrin practices in the Nashville office as a member of the Firm’s Electronic Payments and Blockchain practice groups. She assists clients with regulatory compliance, contract negotiations, acquisitions and fund formation relating to credit card processing and fintech enterprises, including smart contracts and virtual currency matters.